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ombudsman news

issue 84

March/April 2010

investment complaints about property funds, deferral periods and market value reductions (MVRs)

Volatile market conditions have led to an increase in the number of investment complaints referred to us by consumers who have put money in property funds and seen a decline in the value of their investment. We do not deal with complaints that clearly relate solely to poor investment performance. However, it is not uncommon for a complaint prompted by poor performance to reveal underlying issues that we are able to look into, including inappropriate advice and failure by a business to disclose relevant information about any risks relating to an investment.

We have also seen an increase in complaints from consumers who have discovered, when withdrawing money from an investment (or attempting to do so), that the business has implemented a deferral period or a market value reduction (MVR).

Deferral periods (sometimes called "deferment periods") may be introduced by a fund manager to protect the overall value of a fund by temporarily preventing investors from withdrawing their money, or limiting the extent of withdrawals. Market value reductions can be applied to with-profits funds, resulting in investors receiving a smaller amount than they were expecting when they withdrew their investment. The purpose of these reductions is to help protect the value of a fund's underlying assets by preventing those investors who withdraw their money early from receiving more than their fair share of the fund's current value.

Businesses are required to set out, in their terms and conditions, the possibility that a deferral period or market value reduction might be introduced.

The possibility must also be brought to the attention of individual investors at the point of sale. Nevertheless, it frequently comes as an unpleasant surprise to investors when they are faced with the practical consequences of such measures.

We are not usually able to consider complaints relating solely to the timing or extent of deferral periods or market value reductions - since these are properly matters for the commercial judgement of the business concerned. But we will check that the possibility that the business might implement such measures was properly brought to the consumer's attention at the time of the sale. We will also look at whether the investment was suitable for the consumer.

The possibility that an investment could be subject to deferral periods or market value reductions might be an important factor if, for example, the consumer's circumstances meant they required easy and immediate access to their money.

The following case studies illustrate our approach in the type of complaints we have seen recently.

84/05
consumer complains that her withdrawal from a property fund was subject to a deferral period

Several years after Mrs B invested in a property fund she decided to withdraw her money and invest elsewhere. She downloaded a withdrawal form from the website of the business concerned and followed the instructions for completing it. She then signed the form and sent it off to the business.

A week later she received a letter telling her it was "not possible at present" for her to withdraw her funds. The business explained that the day after she had downloaded the form it had imposed a "deferral period" of up to six months for all withdrawals from - or surrenders out of - the property fund.

Mrs B rang the business to say she was surprised and concerned to learn she could not get access to her money immediately. The member of staff she spoke to assured her that her request would be processed "as soon as cash is available in the fund". However, he was unable to tell her when that would be.

She then wrote to the business to complain. She said that before downloading the withdrawal form she had taken care to read all the information on the business's website about withdrawals. She had not seen any warning that she might have to wait up to six months before she got her money. She thought the business had behaved in a "misleading manner" by not publishing a warning about the forthcoming deferral period.

Unhappy with the response she received, Mrs B brought her complaint to us.

complaint not upheld
The terms and conditions of the property fund allowed the business to apply a deferral period "at its discretion". And this possibility was clearly stated in the information Mrs B had been given when she first invested in the fund.

The business provided evidence that it had applied the deferral period the day after Mrs B downloaded the withdrawal form. The business explained that it never made any advance announcement that a deferral period was coming into effect. Any such announcement might prompt a large number of investors to withdraw their money - to the detriment of the fund and its remaining investors.

We accepted that the timing of this particular deferral period had been unfortunate for Mrs B. However, the business had not acted improperly or in a "misleading manner", so we did not uphold the complaint.

84/06
consumer complains he was wrongly advised to invest in a property fund

Shortly before he retired, Mr D contacted a financial adviser about investing a significant sum of money. He subsequently invested all of this money in a property fund.

A couple of years later he complained that the adviser had misled him. He said he had been very disappointed to find the value of his investment had gone down. He claimed the adviser had told him he could expect "an annual return of at least 10%".

When the business denied that its adviser had misled him in any way, Mr D brought his complaint to us.

complaint not upheld
The business sent us the record of its adviser's meeting with Mr D, together with a copy of the adviser's subsequent letter to him. The adviser had noted that Mr D expressed a strong preference for putting all his money in a property fund. Mr D had said he knew about commercial property and was "comfortable with it".

However, the adviser had recommended that Mr D should spread his investment across several different areas. He had specifically advised Mr D against concentrating purely on the property fund.

We did not uphold Mr D's complaint. We said there was clear evidence that he had been advised to spread his investment across different areas rather than putting all his money in the property fund.

Until he retired, Mr D had for many years managed a firm that was engaged in the buying, letting and management of commercial property. We said that in view of this, it was reasonable to assume that he would have realised an investment in commercial property presented potential risks - as well as potential rewards.

84/07
consumer complains about advice to borrow money and invest it in a property fund

Mr J complained that he had been wrongly advised to invest in a property fund bond.

At the time he was given this advice, Mr J was 59 and had a £3,000 repayment mortgage with 18 months left to run. He was advised to borrow a further £50,000 from his mortgage lender, over an 11-year term, and to invest this money in a property fund.

He said he was told the investment would have done so well by the time he was 65 that, as well as being able to repay the £50,000, he would also have a "healthy surplus" for his retirement. However, the value of his investment fell considerably, leaving him with the prospect of still having to meet his mortgage repayments after he had retired.

The business told Mr J that the poor performance of his investment was the result of the "difficult economic climate". It said it had given Mr J all the relevant paperwork before he proceeded with the investment. In its view, it was therefore entirely his responsibility that he had gone ahead with an investment that he had later found unsuitable. Unable to reach agreement with the business, Mr J referred the complaint to us.

complaint upheld
We pointed out to the business that it was responsible for ensuring the advice it gave Mr J was suitable for his needs and circumstances. The fact that it had sent him some written information about the property fund did not mean it had fully discharged that responsibility.

There was nothing to indicate that the adviser had considered the suitability of the advice he had given to Mr J. In addition to the risks normally associated with an investment in a property fund, the proposed course of action required Mr J to borrow the money, before he could invest it.

We said it should have been evident that the property fund investment needed to provide an above-average return just to cover the mortgage interest costs and allow Mr J to break even. If the investment fell in value, then Mr J would find himself having to repay the loan (and meet the monthly payments) after he had retired, when his income would be much reduced.

We thought it very unlikely that Mr J would have been prepared to follow the adviser's recommendation, if those risks had been explained to him. We said the advice had been unsuitable and that the business should put Mr J back in the position he would have been in, if he had not been wrongly advised.

This meant providing him with a sum equivalent to the amount he needed to pay off his mortgage (including any fees and charges), as well as reimbursing him for any additional costs he had incurred while servicing the new mortgage. The business could then deduct the amount realised by the surrender of the bond.

We said the business should also pay Mr J £250 in recognition of the distress and inconvenience it had caused him.

84/08
investor in a with-profits bond says he was not warned that a market value reduction might be applied when he withdrew his money

When Mr A withdrew his investment from a with-profits bond, he received a much smaller sum than he had been expecting. He said he was very surprised to learn that a market value reduction (MVR) of over £6,000 had been applied, and he complained to the business.

Mr A said the business had assured him that his investment "could not fall in value". And he said it had never warned him that a market value reduction might be applied when he came to withdraw his money.

The business did not accept Mr A's complaint. It said the use of market value reductions was accepted practice and the reduction had been properly applied in his case. The business told him the only "problem" was that he had chosen to surrender his bond before the end of its intended term. If he had waited for a while and allowed sufficient time for markets to recover, then there was "a strong chance" that no reduction would have been applied.

complaint upheld
The business told us it had made it very clear to Mr A that the with-profits bond was a long-term investment, with a moderate degree of risk. It said it had "fully explained" the possible effects of any market value reduction that might be applied when he withdrew his money.

We noted that Mr A had been in his late thirties when he was advised to invest in the bond. The information we obtained about his circumstances at that time suggested that he had been in a position to accept a certain degree of risk. However, there was no evidence to support the claim made by the business that it had "fully explained" the risks associated with this particular investment.

None of the documents given to Mr A mentioned the possibility that a market value reduction might be applied. And in both a letter to Mr A and a product brochure, the business had stated that unit prices could not fall. We considered this to be misleading, because the business had not also mentioned that a market value reduction could bring about a fall in the actual value of an investment, when the investor cashed it in.

Given that Mr A had not been properly informed about market value reductions - and their potential effect on his investment - we did not accept the point made by the business that he had "brought the problem on himself" by withdrawing his investment at that particular time.

We upheld the complaint and told the business to calculate redress in a way that put Mr A back in the position he would have been in, if he had not invested in the bond.

It seemed likely that he would have invested the same sum elsewhere, with a view to obtaining a reasonable return. So we said that in its calculations, the business should assume that by investing elsewhere, Mr A would have received the Bank of England base rate over the period concerned, plus one per cent.

84/09
consumer complains that he was wrongly advised to invest in a with-profits bond

After consulting a financial adviser, Mr L invested £50,000 in a with-profits bond. Five years later, he wrote to the business to complain that he had been wrongly advised to make that particular investment.

He said his concerns had been raised after reading several newspaper articles highlighting the risks of with-profits investments. He said it was only after reading these articles that he had realised the bonus rates could fluctuate. And he said the business had never told him that a market value reduction might affect the value of his bond if he needed to cash it in.

Mr L said he would have invested his money elsewhere if the adviser had explained these "drawbacks" to him. He asked for compensation for the amount he had "lost because of inappropriate advice". When the business rejected Mr L's complaint, he referred it to us.

complaint not upheld
We looked at details of Mr L's circumstances at the time he was advised to invest in the bond. The evidence suggested that he had been seeking a better return than he would have got by leaving his money in a deposit account. He had been prepared to leave his money invested over the longer term and had other funds in a readily-accessible savings account elsewhere.

The letters and product literature that the business had given Mr L set out very clearly the features of the with-profits bond, including prominent warnings that a market value reduction might be applied to withdrawals and that bonus rates might fluctuate. We did not uphold the complaint.

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ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.

The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.